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EML > SEC Filings for EML > Form 10-Q on 25-Apr-2014All Recent SEC Filings

Show all filings for EASTERN CO

Form 10-Q for EASTERN CO


25-Apr-2014

Quarterly Report


ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is intended to highlight significant changes in the Company's financial position and results of operations for the thirteen weeks ended March 29, 2014. The interim financial statements and this Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements and Notes thereto for the fiscal year ended December 28, 2013 and the related Management's Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 2013.

Certain statements set forth in this discussion and analysis of financial condition and results of operations are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. They use such words as "may," "will," "expect," "believe," "plan" and other similar terminology. These statements reflect management's current expectations regarding future events and operating performance and speak only as of the date of this release. These forward-looking statements involve a number of risks and uncertainties, and actual future results and trends may differ materially depending on a variety of factors, including changing customer preferences, lack of success of new products, loss of customers, competition, increased raw material prices, problems associated with foreign sourcing of parts and products, changes within our industry segments and in the overall economy, litigation and legislation. In addition, terrorist threats and the possible responses by the U.S. government, the effects on consumer demand, the financial markets, the travel industry, the trucking industry and other conditions increase the uncertainty inherent in forward-looking statements. Forward-looking statements reflect the expectations of the Company at the time they are made, and investors should rely on them only as expressions of opinion about what may happen in the future and only at the time they are made. The Company undertakes no obligation to update any forward-looking statement. Although the Company believes it has an appropriate business strategy and the resources necessary for its operations, future revenue and margin trends cannot be reliably predicted and the Company may alter its business strategies to address changing conditions.

In addition, the Company makes estimates and assumptions that may materially affect reported amounts and disclosures. These relate to valuation allowances for accounts receivable and for excess and obsolete inventories, accruals for pensions and other postretirement benefits (including forecasted future cost increases and returns on plan assets), provisions for depreciation (estimating useful lives), uncertain tax positions, and, on occasion, accruals for contingent losses.

Overview

Sales in the first quarter of 2014 decreased in the Industrial Hardware segment by 7% when compared to the first quarter of 2013 and sales increased compared to the prior year period in both the Security Products segment and the Metal Products segment by 14% and 8%, respectively, resulting in a 3% consolidated increase compared to the 2013 quarter. Sales volume of existing products decreased in 2014 by less than 1% compared to the first quarter of 2013. The first quarter of 2014 was favorably effected by selective price increases to customers of less than 1% and the introduction of new products which increased sales by 3%.

For the three months ended March 29, 2014, gross margin as a percentage of sales was 21% compared to 18% in the comparable period of 2013. This increase was primarily the result of increased sales volume causing higher utilization of the Company's production capacity in the 2014 period.

Raw material prices have increased from the prior year period. The Company, through price increases, is recovering these additional costs from our customers, wherever possible. The Company expects raw material prices to continue to increase as worldwide economic conditions improve, which may have a negative impact on future operating margins. Currently, there is no indication that the Company will be unable to obtain supplies of all the raw materials that it requires.


Cash flow from operations in the first quarter of 2014 decreased compared to the same period in 2013. This decrease is primarily due to the timing differences in the collections of accounts receivable, payments of liabilities, and changes in inventories. Cash on hand and cash flow from operations, along with the result of controlling discretionary expenditures, should be sufficient to enable the Company to meet all its existing obligations and continue its quarterly dividend payments.

A more detailed analysis of the Company's results of operations and financial condition follows:

Results of Operations

The following table shows, for the periods indicated, selected line items from
the condensed consolidated statements of operations as a percentage of net
sales, by segment:


                                    Three Months Ended March 29, 2014

                                    Industrial Security    Metal
                                      Hardware Products Products  Total
Net sales                               100.0%   100.0%   100.0% 100.0%
Cost of products sold                    74.8%    78.8%    85.8%  79.0%
Gross margin                             25.2%    21.2%    14.2%  21.0%

Selling and administrative expense       17.4%    16.8%     7.1%  14.6%
Operating profit                          7.8%     4.4%     7.1%   6.4%


                                    Three Months Ended March 30, 2013

                                    Industrial Security    Metal
                                      Hardware Products Products  Total
Net sales                               100.0%   100.0%   100.0% 100.0%
Cost of products sold                    81.4%    80.4%    84.8%  81.9%
Gross margin                             18.6%    19.6%    15.2%  18.1%

Selling and administrative expense       14.6%    17.3%     6.6%  13.5%
Operating profit                          4.0%     2.3%     8.6%   4.6%


The following table shows the amount of change for the first quarter of 2014 compared to the first quarter of 2013 in sales, cost of products sold, gross margin, selling and administrative expenses and operating results, by segment (dollars in thousands):

                               Industrial    Security      Metal
                                 Hardware    Products   Products       Total
Net sales                       $ (1,085)     $ 1,567      $ 675     $ 1,157

     Volume                        -11.8%       12.6%       3.1%       -0.4%
     Prices                          0.1%        0.4%       0.0%        0.2%
     New products                    4.6%        1.3%       4.8%        3.5%
                                    -7.1%       14.3%       7.9%        3.3%

Cost of products sold           $ (1,820)     $ 1,064      $ 665      $ (91)
                                   -14.7%       12.1%       9.2%       -0.3%

Gross margin                     $    735     $   503      $  10     $ 1,248
                                    26.0%       23.4%       0.8%       19.9%

Selling and administrative
expenses                         $    243     $   196      $  97      $  536
                                    10.9%       10.3%      17.5%       11.5%

Operating profit                 $    492      $  307     $ (87)      $  712
                                    81.4%      123.3%     -11.8%       44.9%

Industrial Hardware Segment

Net sales in the Industrial Hardware segment were down 7% in the first quarter of 2014 compared to the prior year quarter. The lower sales in the first quarter of 2014 reflected a decrease in sales of existing products, primarily lightweight composite panels which were used in the fracking industry, as well as lower sales to our distributers and military markets in the first quarter of 2014 compared to the prior year quarter. The decrease in sales of the lightweight composite panels for the fracking tank was the result of a customer exiting the fracking business. The overall decrease in sales was offset by an increase in sales to several of the markets we sell into, including: the Class 8 truck, truck accessory, off-highway, bus, and trailer markets in 2014 compared to the same period in 2013, selective price increases to customers and the introduction of new products. All of the new products were developed internally and included a rotary lock, a cab handle and paddle, a rotary and lever arm, a lever assembly, a striker pin and luggage latch for the Class 8 truck market; a rotary, a mini rotary and a gate lock for the off-highway market; a trigger latch for the bus market; a 3 point compression latch, a stainless steel catch, a trigger latch and a paddle assembly for the distribution market; a striker and rotary and a paddle rotary for the industrial market; as well as a variety of locking and latching products for the many markets we serve.

Cost of products sold for the Industrial Hardware segment decreased $1.8 million or 15% in the first quarter of 2014 compared to the first quarter of 2013. The most significant factors resulting in changes in cost of products sold in the 2014 quarter compared to the 2013 quarter included:

a decrease of $0.9 million or 12% in raw materials;
a decrease of $0.4 million or 12% in costs for payroll and payroll related charges;
an increase of $0.3 million or 384% in miscellaneous income;
a decrease of $0.1 million or 38% in costs for equipment rental;
a decrease of $0.1 million or 27% for depreciation.

Gross margin as a percentage of net sales for the Industrial Hardware segment increased from 19% in the first quarter 2013 to 25% in the first quarter of 2014. The increase in gross margin for the 2014 period reflects the mix of products produced and the changes in cost of products sold discussed above.


Selling and administrative expenses in the Industrial Hardware segment increased $0.2 million or 11% from 2013 to 2014. The most significant factors resulting in changes in selling and administrative expenses in the Industrial Hardware segment in the first quarter of 2014 compared to the 2013 quarter was:

an increase of $0.1 million or 7% in payroll and payroll related charges;
and an increase of $0.1 million or 311% in advertising expenses.

Security Products Segment

Net sales in the Security Products segment increased 14% in the first quarter of 2014 compared to the first quarter of 2013. The increase in sales in the first quarter of 2014 in the Security Products segment is primarily the result of increased sales volume of existing products across many of the markets we serve. Selective price increases and the introduction of new products added to the sales increase. Sales of new products included a flush mount handle for tonneau covers, a locking T-handle for truck caps and cable and stud locks for bicycle racks for the vehicular market and a custom brass padlock and a rekeyable padlock for the locksmith market.

Cost of products sold for the Security Products segment increased $1.1 million or 12% in 2014 as compared to the first quarter of 2013. The most significant factors resulting in changes in cost of products sold in the first quarter of 2014 compared to 2013 quarter included:

an increase of $0.3 million or 5% in raw materials;
an increase of $0.3 million or 17% in payroll and payroll related charges;
an increase of $0.2 million or 126% in costs for supplies and tools;
and an increase of $0.2 million or 617% in freight and shipping costs.

Gross margin as a percentage of sales for the Security Products segment increased from 20% to 21% primarily due to the higher sales volume in 2014 compared to the same period in 2013.

Selling and administrative expenses in the Security Products segment increased $0.2 million or 10% in the first quarter of 2014 compared to the same period in 2013. The most significant factor resulting in changes in selling and administrative expenses in the Security Products segment in the first quarter of 2014 compared to the 2013 quarter was:

an increase of $0.2 million or 13% in payroll and payroll related charges.

Metal Products Segment

Net sales in the Metal Products segment increased 8% in the first quarter of 2014 as compared to the prior year period. The higher sales in the first quarter of 2014 reflected an increase in sales of existing products and the introduction of new products. Sales of mining products were up 5% in 2014 compared to the first quarter of 2013 and sales of contract castings increased 29% from the prior year levels. The increase in sales of mining products was driven by stronger demand in the first quarter of 2014 in the U.S. mining market compared to the prior year first quarter. Mining sales benefited from the introduction of new mining products including a cable head, a shell and a small hole flange nut. The increase in sales of contract casting was primarily the result of sales of a new rail clamp product for a solar panel application.


Cost of products sold for the Metal Products segment increased $0.7 million or 9% in the first quarter of 2014 compared to the same period in 2013. The most significant factors resulting in changes in cost of products sold in the first quarter of 2014 compared to the 2013 first quarter included:

an increase of $0.2 million or 15% in raw materials;

an increase of $0.2 million or 41% related to costs for maintenance and repairs;

an increase of $0.2 million or 22% in costs for supplies and tools;

and an increase of $0.1 million or 16% for utility costs.

Gross margin as a percentage of net sales decreased from 15% in the first quarter of 2013 to 14% for the 2014 quarter. The decrease is due to the mix of products produced and the cost increases noted above.

Selling and administrative expenses in the Metal Products segment increased $0.1 million or 18% in the first quarter of 2014 compared to the same period in 2013. The most significant factor resulting in changes in selling and administrative expenses in the Metal Products segment in the first quarter of 2014 compared to the 2013 quarter was:

an increase of $0.1 million or 16% in payroll and payroll related charges.

Other Items

Interest expense decreased 20% in the first quarter of 2014 compared to the prior year period due to the decreased level of debt.

Other income for both periods presented was not material to the financial statements.

Income taxes reflected the change in the operating results. The effective tax rate in the first quarter of 2014 was 32.8% and was comparable to the 2013 effective rate which was 33.3%.

Liquidity and Sources of Capital

The Company generated $413,000 of cash from its operations during the first three months of 2014 compared to $706,000 during the same period in 2013. The decrease in cash flows in the quarter was primarily the result of the associated timing differences in the collections of accounts receivable, payments of liabilities, and changes in inventories. Cash flow from operations coupled with cash on hand at the beginning of the year was sufficient to fund capital expenditures, debt service, and dividend payments.

Additions to property, plant and equipment were $700,000 for the first three months of 2014 compared to $1.3 million for the same period in 2013. Total capital expenditures for 2014 are expected to be approximately $5 million. As of March 29, 2014, there is approximately $500,000 of outstanding commitments for these capital expenditures.

The following table shows key financial ratios at the end of each period:

                                              First    First   Year
                                             Quarter  Quarter   End
                                               2014     2013   2013
Current ratio                                   5.5      5.6   5.2
Average days' sales in accounts receivable       47       49    47
Inventory turnover                              3.7      3.8   3.7
Total debt to shareholders' equity              7.0 %    9.9 % 7.4 %


The following table shows important liquidity measures as of the balance sheet date for each period below (in millions):

                                                       First     First    Year
                                                      Quarter   Quarter    End
                                                       2014      2013     2013
Cash and cash equivalents
   - Held in the United States                      $     9.4 $     9.2 $  10.2
- Held by a foreign subsidiary                            9.1       7.7     9.8
                                                         18.5      16.9    20.0
Working capital                                          58.3      57.3    57.4
Net cash provided by operating activities                 0.4       0.7    11.3
Change in working capital impact on net cash
  (used)/provided by operating activities                (2.0 )    (1.3 )  (0.2 )
Net cash used in investing activities                    (0.7 )    (1.3 )  (5.5 )
Net cash (used in)/provided by financing activities      (1.0 )    (1.0 )  (4.0 )

U.S. income taxes have not been provided on the undistributed earnings of the Company's foreign subsidiaries except where required under U.S. tax laws. The Company would be required to accrue and pay United States income taxes to repatriate the funds held by foreign subsidiaries not otherwise provided. The Company intends to reinvest these earnings outside the United States indefinitely.

All cash held by foreign subsidiaries is readily convertible into other currencies, including the U.S. Dollar.

Total inventories remained fairly constant at $30.3 million on March 29, 2014 compared to $30.7 million at year end 2013 and $29.8 million at the end of the first quarter of 2013. Accounts receivable was $18.2 million compared to $16.3 million at year end 2013 and $18.4 million at the end of the first quarter of fiscal 2013. The increase from year end is related to higher revenues in the first three months of the current year.

Cash on hand, cash flow from operating activities and funds available under the revolving credit portion of the Company's Loan Agreement are expected to be sufficient to cover future foreseeable working capital requirements.

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